Budget turned a blind eye to reality of economic slowdown

The Union Finance Minister’s speech hid more than it revealed. So much time was spent on Aspirational India, Economic Development and Caring Society, that many of what was said did not fit easily under those labels.

The Union Budget of 2020-21 has chosen to hide the above reality with the average growth rate for the 2014-19 period, the narrowing of trade deficit, increase in inflow of FDI and so on.

The basic mistake of the 2019-20 Union Budget is being repeated. Within four months of her maiden Budget, the Union Finance Minister had to propose three so-called “mini Budgets”, revising some of the key tax proposals, providing tax concessions, advancing recapitalising the banks and so on. The Budget had turned a blind eye to the growing reality of slowdown in the economy. As slowdown accelerated, a slew of supply side financial measures had to be introduced which, however, had little impact on the downward slide of the economy. The profits and cash balance of corporate companies sharply improved, there was much cheer in the share market, but there was very little to show on the investment front. For four successive months, the core industrial sectors continued to shrink. And so, finally, the Government of India had to revise its own projection of GDP growth for 2019-20 to 4.9 per cent.

The Union Budget of 2020-21 has chosen to hide the above reality with the average growth rate for the 2014-19 period, the narrowing of trade deficit, increase in inflow of FDI and so on. So the Budget assumes that the supply side economics is working and seeks to pursue more of the same. At consultations with state finance ministers on the Union Budget, there was almost a consensus that measures had to be adopted to stimulate aggregate demand in the economy. Bihar Finance Minister Sushil Kumar Modi even had a written note where he argued that states also be allowed to have higher fiscal deficit given the recessionary conditions.

The present situation is a clear case of failure of aggregate demand. Unpublished reports of the National Sample Survey revealed that per capita monthly consumption in 2017-18 was s lower than in 2011-12 and that unemployment in 2019 was at a 45-year high. So I had expected that there would be a course-correction in government spending.

It is most surprising that the total expenditure Rs 30.4 lakh crore is only 9 per cent higher than the budget estimate of 2019-20 and as a ratio to GDP, it is even marginally lower. In her long-winding Budget speech, the Finance Minister didn’t for once care to compare her outlays with the previous years. Such a comparison would have revealed the lie of her claims of the Budget being pro-agriculture and pro-poor. The allocation for the employment guarantee programme – on which Rs 61,815 crore was spent in 2018-19 and Rs 71,002 crore in 2019-20 — is only Rs 61,500 crore in 2020-21. Similar is the fate of many of the so-called ‘care’ programmes. The allocation for agriculture-allied sectors is only Rs 1.5 lakh crore, same as in the previous year. Embarrassingly, women empowerment programmes have also faced a cut.

The basic constraint to the Budget has been on the receipt side where there have been huge tax giveaways. The corporate tax budget is less than the receipts in 2018-19. Therefore, to keep the budget deficit in check, the Union government has decided to once more raid Reserve Bank reserves and target to sell public sector firms, including IDBI and LIC.

After adopting all these measures, the share markets have slid, with the Sensex by 1,000 points. Maybe they had expected more, like a sharp reduction in long-term capital gain tax. One wonders what the Union Finance Minister can give further for corporate appeasement. The poor and unorganised sectors cannot retaliate as the corporate share brokers in the share market. If they could, they would have booted out the Budget of 2020-21.

The Budget of 2020-21 is also significant since this is the first year of the 15th Finance Commission. The worst fears expressed by many states seems to be coming true. Though there is only a marginal reduction in the tax share of states from 42 per cent to 41 per cent, the tax devolution to the states is seen to be only Rs 7,84,181 crore as against the actual transfer of Rs 7,61,454 crore in 2018-19. The share of many states like Kerala has sharply declined. Kerala’s tax share, which was budgeted to be Rs 19,000 crore in 2019-20, would only be Rs 15,236 crore in 2020-21. Its share in the horizontal distribution of tax share declined from 2.5 to 1.9 per cent. Details of distribution of other grants are not yet available to make a final assessment. The GST compensation would in future be limited to compensation cess. There will be no relaxation of the borrowing ceiling for states. There is no proposal for additional borrowing for states facing natural calamities.

The Union Finance Minister’s speech hid more than it revealed. So much time was spent on Aspirational India, Economic Development and Caring Society, that many of what was said did not fit easily under those labels. If one were to search for a macro-economic vision and direction in this Budget, it would be in vain.